Factors Affecting Commodity Prices

In the July 2011 special survey, we asked our panellists to rank the current
importance of a range of different factors in determining commodity price
movements. Scores were assigned to each of the factors shown in the table
below on a scale of 0 (no influence) to 10 (very strong influence). The
consensus results are the averages of individual panellists' scores for
each factor. Given that different commodities are influenced by a wide range
of factors, we limited the variables considered to a common list of five
factors which we asked our panellists to assess for each. In addition, we
asked them to suggest, and rank, other factors which they felt to be of
particular importance. The most frequently cited (if any) of these for each
commodity appears in the right-hand column.

Commodity prices, which were remarkably resilient to the 2009 global slowdown,
are notoriously volatile and clearly influenced by a wide range of different
factors. The importance of each factor varies from commodity to commodity
and, for any given one of them, over time. This special survey on ‘Factors
Affecting Commodity Prices’ asks our panellists to compare and rate
the differing degrees of sensitivity with which the price of different commodities
respond to a range of influences. As these factors sometimes work in opposite
directions, it should also help to determine which of them are likely to
dominate. The graphs on the next page illustrate the direct relationships
between commodity prices and some explanatory factors. A graph of the price
of gold (US$/oz.) and the US dollar index
(measured against a broad range of currencies) is shown first, as the former
is traditionally considered a good long-term hedge against weakness in the
latter. Both variables are correlated negatively with each other (the US$
index is plotted on an inverted scale) and in recent times, that inverse
relationship has been reinforced by the US dollar facing significant downward
pressure on the back of worries over the health of the US economy and its
public debt outlook. It is not uncommon for short-term fluctuations from
trend to occur during periods of heightened uncertainty, though, as fiscal
pressures continue to weigh on other currencies relative to the dollar,
too. The next graph shows the price of copper (US$/MT)
and volume of imported copper products in China. Chinese
demand for the metal remains high, but the chart does show some faltering
over the course of 2010 and this year. The Chinese authorities, worried
about the economy overheating, recently tightened monetary policy in a bid
to rein in price pressures. This (coupled with signs of an economic slowdown)
has hit copper imports, although latest data for June suggest a modest fillip
in copper products entering the country. Copper prices, meanwhile, have
climbed steadily on the back of hopes for Chinese demand to remain strong
– and on signs of buoyant activity in the emerging markets. By contrast,
the Euro zone and US are still going through a period of economic, fiscal
and financial insecurity as their respective debt crises hit market sentiment.
Indices of the Standard & Poor’s 500 and the
Economist Base Metals Index (bottom right chart) illustrate
the magnified effect of financial volatility on metals prices. Lastly, the
movement in the prices of crude oil (WTI) and US
natural gas have shown a decoupling over the past two years –
crude and natural gas are viewed as substitutes of each other. WTI
has been lifted partly by worries over supply constraints, a factor rated
as influential on its price by our panels (averaging 6.3 out of 10). Second
to supply is world demand which, despite the economic moderation in the
US and softness evidenced in the Chinese economy, is expected to remain
robust. The ranking is down from our panellists rating of 8.2 last year,
though, underscoring the loss in momentum amongst the two most important
energy consuming countries. By contrast, government trade policies and investment
funds are likely to have only a small impact on the price of WTI. Interestingly,
our respondents awarded an 8.0 rating to ‘other factors’ (not
shown). This could represent many things but geopolitical risks, including
civil war in Libya, possibly rank highly, as do refining constraints.

The Price of Gold and the US Dollar

Chinese Copper Imports* and the Price of Copper

‘Demand/business cycle’ is an influential factor affecting
commodity prices, according to most of those surveyed, averaging about 6.8
out of 10 in total. Indeed, for aluminium, copper,
steel and palladium, respondents ranked
this particular determinant 8 out of 10. ‘Government trade policies,’
in comparison, averaged a mere 1.8 for all commodities shown, perhaps reflecting
the increasingly globalized nature of the world economy today. Interestingly,
the impact of ‘investment funds’ – which played an important
role last year in the determination of metals’ prices – has
lessened this time around, with the exception of silver
where it is rated 9 out of 10 in terms of importance and gold
where it is rated 6.7. Gold is usually a dominant default commodity for
speculators when equities and the US dollar are suffering.